Bharat Petroleum – E&P not enough : RBS

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Bharat Petroleum – E&P not enough


BPCL's stock price has corrected sharply despite a spate of good news on global oil/gas
discoveries, as the outlook for core domestic marketing operations has worsened following a
sharp rise in global oil prices. We raise our target to Rs580 (from Rs560) to reflect the higher E&P
upside and upgrade from Sell to Hold.

Rising oil prices have put off earlier positive expectations
Earlier market expectations of auto fuel deregulation and full compensation for cooking fuel
under-recoveries have been put off, as global oil prices have risen by nearly US$20/bbl in the last
three months. Even petrol, which was ‘deregulated’, is suffering under-recoveries, and prospects
for price hike in other retail regulated products (diesel, LPG, kerosene) are looking dim due to
renewed inflation concerns. Estimates for under-recoveries are rising in line with global oil prices,
raising concerns on adequate compensation for oil marketing companies (OMCs) like BPCL.
No change to earnings estimates
Our estimates assume status quo, ie, some price hikes, no deregulation, that under-recoveries
continue and Indian government (GOI) compensation is pegged at levels that ensure ongoing
ROE of 11-12% for HPCL (BPCL’s ROE at 12-13%). Given this assumption, we maintain our
earnings estimates, even though oil prices and resultant gross under-recoveries are likely to end
up higher than we were expecting.
Rise in E&P value, upgrade following stock correction
We maintain our core business valuation at Rs510/share (1.1x FY11F P/B) but raise E&P value
from Rs50/share to Rs70/share, resulting in a target price of Rs580 (up from Rs560). The
additional valuation is for gas reserves in Mozambique, where the Operator (Anadarko) has
confirmed that the discoveries to date exceed the resource size threshold necessary to support

LNG development. Consequently, we estimate gross reserve size of 4tcf (BPCL stake 10%),
which we value at US$142m (Rs20/share). Post correction, the stock price has come in line with
our target and, hence, we upgrade the stock from Sell to Hold. Most of the bad news is the price,
in our view, although investors would need to wait patiently for the difficult-to-predict positive
news flow to emerge (any drop in global oil prices and/or the next round of domestic price hikes).